Regal Savings Bank v. Sachs

RODOWSKY, Judge. Here the plaintiff alleges that a bank and its holding company forced his resignation as a consultant to the bank, thereby breaching a contract between the parties for two years of future employment in that capacity. The defendants assert that the circuit court properly entered summary judgment in their favor because there was good cause for terminating plaintiffs employment as a consultant based on the plaintiffs overdrafts while serving as the bank’s president under an at-will contract that immediately preceded the consulting contract. For the reasons set forth below we agree with the holding by the Court of Special Appeals in Sachs v. Regal Sav.

Bank, FSB, 119 Md.App. 276 , 705 A.2d 1 (1998), that the circuit court erred in granting summary judgment for the defendants. Plaintiff, and respondent here, is Stewart D. Sachs (Sachs). He was hired in 1976 as the managing officer of a state-chartered savings and loan association that evolved into Regal Savings Bank, FSB (the Bank), one of the defendants and petitioners. Over time Sachs was elected president, CEO, and a director of the Bank which in 1981 converted from a mutual association to a stock company.

Sachs also was elected president and a director of Regal Bancorp., Inc. (Regal), the Bank’s corporate parent and the other defendant-petitioner. Regal owned five nonbank subsidiaries, and Sachs was an officer and director of each of these nonbank subsidiaries. ³⁵⁸ I Because this is a case that was decided on summary judgment, we are obliged to resolve most favorably to Sachs, as the party opposing summary judgment, all conflicts of fact and all inferences that reasonably may be drawn from the facts. Further, the record in this case, with the exception of certain documents that are discussed, infra, consists primarily of the testimony on deposition of Sachs. Although several directors and an employee of the Bank were deposed, only a few short excerpts from their depositions are included in the record— quite possibly in recognition by the Bank that conflicting evidence, for purposes of a motion for summary judgment, would be reconciled against the Bank, as movant.

Thus, it is through Sachs’s eyes that we obtain a description of the business atmosphere at the Bank and of the relationship between Sachs and the Bank’s board of directors. As we shall see, that description does not conform to the average person’s model for a bank. Sachs demonstrated considerable skill in generating business for Regal and its subsidiaries. When he was hired by the Bank at age twenty-five it had assets of $800,000 and no net worth.

When he was forced to resign in 1993 the Bank held assets of $40 million and had a net worth of approximately $6 million. During the first ten years of Sachs’s employment by the Bank he worked very hard on its business, and in the seven years preceding his forced resignation he also engaged in personal business pursuits, using the Bank as his base of operations with the full knowledge of its board of directors. During the latter period approximately seventy-five percent of his time was spent on Bank business and twenty-five percent on his personal business. His personal business included mortgage lending, equipment leasing, and investments in rental real estate.

Sachs “had a free hand to do almost anything [that he] wanted to do that was legal.” In 1986 Sachs, together with a twenty-five percent stockholder and director in the Bank, started another bank in which a number of the members of the board of Regal became investors. During his last year of employment at the Bank, Sachs was spending two ³⁵⁹ days a week in New Jersey, where he had a business venture, and only three days a week at the Bank. In December 1991 Sachs, as president of the Bank, circulated a revision to the Bank’s employees manual advising that overdrafts were “not permissible,” that the items would be returned unpaid, and that the employee’s checking account privilege would be discontinued, at the option of the Bank, if there were three overdrafts within a six month period. In April 1992 Sachs, together with the other officers and directors of the Bank, signed a policy statement dealing with the avoidance of conflicts of interests.

Paragraph three of that statement provided: “The Bank is prohibited from paying an overdraft on an account of any of its affiliated persons. The overdraft prohibition is not applicable to a principal shareholder who is neither a director nor executive officer of the Bank (or to a related interest of such shareholder).” In October 1992 Sachs and his secretary respectively furnished the Bank’s check processing department with two lists of accounts at the Bank. The first listed accounts of Sachs or of his secretary and accounts of certain of their respective related interests. The second list was of other accounts from which money was to be transferred to cover overdrafts in the accounts on the first list, upon contacting Sachs’s secretary.

A further memorandum, dated March 11, 1993, that was sent to a specific employee in the check processing department referred that employee to the October 1992 memorandum and again requested that overdrafts be referred to Sachs’s secretary for approval of the withdrawals from other accounts to cover any overdrafts. 1 For the first part of Sachs’s employment by the Bank its accounts were insured by a private insurer, but in the latter part of Sachs’s career with the Bank its accounts were federally insured and its operations subject to regulation by the ³⁶⁰ Office of Thrift Supervision (OTS). Sachs was openly contemptuous of the federal regulatory requirements which he repeatedly described on deposition as “bull__” By early 1993 Sachs had formed the idea that he would resign as president of the Bank, an idea that he discussed with the executive committee of the Bank’s directors. A number of factors led to Sachs’s decision. He knew that the board was uncomfortable about his outside activities and that the directors were concerned about personal liability based on his conduct.

He knew that the board wanted someone of whom the federal regulators would approve. Further, Sachs had become somewhat “disgusted” with the increasing pressure over the prior year that the number two operating officer of the Bank, vice president Allen Holzman, was putting on Sachs by “reviewing so-called conflicts of interest” of Sachs in his other business activities. As a result, in early 1993, the board formed a search committee to locate a new president and CEO, who would be responsible for the day-to-day operations of the Bank. Sachs would continue to be responsible for business development for the Bank, as well as for management of Regal and its nonbank subsidiaries.

On March 8, 1993, when Sachs’s replacement had been selected but not yet hired, Sachs formally tendered his resignation as president and CEO of the Bank. It was accepted at a special board meeting on March 18,1993. The board agreed that Sachs would continue to hold his remaining positions with Regal and its subsidiaries and serve as a consultant to the Bank. The board further agreed that Sachs would continue to receive his current salary (which was $127,000 per year) and benefits for a period of two years beginning April 1, 1993, and ending March 31, 1995.

Arrangements were made for Regal to sublet an office for Sachs at a nearby location out of the Bank’s headquarters. Sachs continued to manage the day-today operations of the Bank, pending the commencement of work by the new president. ³⁶¹ On March 29,1993, the Bank’s independent auditors advised the audit committee of the board that Sachs, certain members of Sachs’s family, and entities owned or controlled by Sachs or by his secretary had incurred numerous overdrafts in twenty-four accounts at the Bank, but that no overdraft charges or interest had been assessed in connection with any of those overdrafts. A subsequent analysis by the auditors that is presented by petitioners in support of summary judgment determined that these persons and entities had accumulated 799 overdrafts from January 1992 through March 1993. These overdrafts included 393 overdrafts in Sachs’s personal and business accounts, 346 overdrafts in the accounts of Sachs’s former wife and of his cousin, and 60 overdrafts in the accounts of his secretary who was also the Bank’s corporate secretary.

All overdrafts were eventually covered. At more times than not the Bank held the overdrafts for longer than one day—sometimes for days at a time. If a NSF charge of $25 had been imposed on each of these overdrafts, the charges would have totaled $19,975. The auditors also computed the average daily balance of the overdrafts for 1992 and the first quarter of 1993 in all of the same accounts.

If interest at the rate of twelve percent per annum had been charged on the average daily balances in all of the accounts, the interest would have totaled $4,298.81. On April 1, 1993, the Bank promulgated a not sufficient funds policy which provided in part: “The check may be honored if the customer has less than three overdrafts during the last year. Checks from customers with a favorable long term relationship with [the Bank] may be honored with the approval of the Supervisor of Operations.” 2 On April 2, 1993, two of the Bank’s directors confronted Sachs regarding the overdrafts. Sachs -did not dispute the auditors’ findings.

The directors insisted that Sachs immediately resign all of his positions with Regal and its subsidiaries, ³⁶² or he would be removed from those positions. Sachs chose to resign, effective April 2, 1993, as president of Regal and from the boards of Regal and the Bank. At a special meeting held on April 2, 1993, the Bank’s board formally accepted Sachs’s resignation. The minutes of that meeting read in part: “The action was prompted by the Board becoming aware of deviations in the policies and procedures relating to overdrafts in employee checking accounts.

Specifically, accounts controlled by or associated with Mr. Sachs and/or his secretary.... The Board voted to rescind Mr. Sachs’ two year consulting agreement as detailed in its resolution of March 18.” Minutes of a meeting of the board of directors of Regal, also dated April 2, 1993, are identically worded. Shortly thereafter, Sachs resigned his remaining positions as an officer and director of each of Regal’s nonbank subsidiaries. Additional facts will be stated in the analysis of the arguments of the parties.

II Sachs instituted suit alleging that Regal and the Bank breached the contract to employ him as a consultant for a period of two years. Sachs demanded damages equal to the compensation and benefits he would have received over that two-year period. After discovery, Regal and the Bank moved for summary judgment on the ground, inter alia, that Sachs’s admitted conduct violated federal banking law and the Bank’s policies and constituted cause to terminate Sachs’s employment. The circuit court granted summary judgment for the defendants, holding that the overdrafts furnished just cause.

On Sachs’s appeal to the Court of Special Appeals, that court held that a jury issue was presented. Sachs, 119 Md.App. at 288 , 705 A.2d at 6 . Although agreeing with the defendants that the material facts regarding Sachs’s misconduct were not in dispute, the court concluded that the undisputed facts were subject to conflicting inferences. The court reasoned that, viewing the undisputed facts in a light most ³⁶³ favorable to Sachs, an inference could be drawn that Sachs’s misconduct was not sufficiently “material” to warrant the termination of his employment.

Id. We granted Regal’s and the Bank’s petition for certiorari. The petitioners submit that the decision below ignored well-settled principles of Maryland employment law, that it disregarded applicable federal banking regulations, and that it incorrectly applied the summary judgment standard. 3 On the other hand Sachs claims that there is evidence that the Bank’s board knew of his failure to follow rules and regulations before he was rehired as a consultant so that the Bank should be precluded from using that misconduct as the basis for firing him. Further, Sachs argues that the standard for deciding whether the Bank had “just cause” for terminating his employment as a consultant hinges on whether he “materially breached” that contract and that the materiality of his conduct as president to his service as a consultant at least raises a jury question.

Ill The Court of Special Appeals correctly identified the principal issue to be the materiality of any misconduct in which Sachs was proved to have engaged as president of the Bank to his employment as a consultant. For the breach of duty by an employee to extinguish the obligation of the employer to pay future compensation under a contract of employment, the breach, even if willful, must be material. St. Paul at Chase v. Manufacturers Life Ins. Co., 262 Md. 192, 217-18 , 278 A.2d 12, 25 , cert. denied, 404 U.S. 857 , 92 S.Ct. 104 , 30 L.Ed.2d 98 (1971); Maryland Credit Fin.

Corp. v. Hagerty, 216 Md. 83, 92 , 139 A.2d 230, 234 (1958). Petitioners cite Peurifoy v. Congressional Motors, Inc., 254 Md. 501 , 255 A.2d 332 (1969), involving a contract of employment as the comptroller and general manager of an automo ³⁶⁴ bile sales dealership. The employee, apparently due to mental health problems, was unable to perform. We affirmed the grant of a motion for judgment in favor of the defendant.

Based on the testimony produced by the plaintiff, we held that he had breached the “constructive concurrent condition that [he] would render service as comptroller and general manager in a reasonably satisfactory manner and in accordance with generally accepted standards for that employment.” Id. at 515 , 255 A.2d at 339 . The principle applied in Peurifoy is sometimes called the constructive condition of substantial performance. New York Bronze Powder Co. v. Benjamin Acquisition Corp., 351 Md. 8, 20 , 716 A.2d 230, 235-36 (1998); Beckenheimer’s Inc. v. Alameda Assocs. Ltd. Partnership, 327 Md. 536, 554-55 , 611 A.2d 105, 113-14 (1992); see also 3A A. Corbin, Corbin on Contracts § 679 (1960) (“The employer’s duty to pay wages is almost always constructively conditional on the rendition of substantial performance of his promised service by the employee.”).

The condition referred to in Peurifoy is not one, the non-fulfillment of which terminates the employer’s promised performance without regard to the substantiality of the employee’s performance. This is made clear by Peurifoy’s citation to Foster-Porter Enters., Inc. v. De Mare, 198 Md. 20, 34 , 81 A.2d 325, 332 (1951). Peurifoy, 254 Md. at 515 , 255 A.2d at 339 . At the cited pages in Foster-Porter; this Court said that “[u]nless a contract provision for termination for breach is in terms exclusive, it is a cumulative remedy and does not bar the ordinary remedy of termination for ‘a breach which is material, or which goes to the root of the matter or essence of the contract.’ ” 198 Md. at 36 , 81 A.2d at 333 (citations omitted).

IV The minutes of the petitioners’ board meetings of April 2, 1993, evidence that the only assigned reason for “rescind[ing]” the consulting contract was the overdrafts. On the present record there is a factual issue whether the Bank’s board knew of overdrafts prior to its March 18, 1993 approval of the consulting contract. Sachs testified that Holzman knew of the ³⁶⁵ overdrafts. Given the evidence of Holzman’s penchant for complaining about Sachs’s irregular conduct, a jury could infer that these complaints included the overdrafts and were communicated to the Bank’s board.

Further, Sachs testified that he and members of the board, including specifically the chairman of both boards, were engaged in business ventures together and that the accounts of those ventures were maintained at the Bank. From time to time the accounts of those ventures were overdrawn, but NSF fees were not assessed. Sachs says this was because “[njobody cared” whether it was appropriate not to assess the fees. This evidence bears on the materiality of Sachs’s overdrafts.

It suggests that Sachs’s overdrafts only became material after the Bank had found a new president while it remained obligated to pay Sachs $254,-000 over two years, plus benefits. Also bearing on materiality are certain federal regulations that address overdrafts and that underlie the Bank’s policies on overdrafts. A federal savings bank is a federal savings association that converted from a state chartered association under Section 5(o) of the Home Owners’ Loan Act, 12 U.S.C. § 1464 (o). By 12 U.S.C. § 1468 (b) extensions of credit to executive officers, directors, and principal shareholders in federal savings associations are made subject to the restrictions, inter alia, of subsection (h) of Section 22 of the Federal